Midterm 2 Topic Review - ECON 251x Topical Review for...

ECON 251x: Topical Review for Second Midterm (Spring 2011)(Chapters 5,6 -9, 18)The following is a general guideto the material we have covered since the first midterm. It is not necessarily definitive.NEW: 5. Uncertainty & Consumer behavior ( Chapter 5)A.Defined probability, Expected value, payoff.Probability: likelihood that a given outcome will occurSubjective probabilityis the perception that an outcome will occursExpected Value: probability-weighted average of the payoffs associated with a possible outcomePayoff: value associated with a possible outcomeB. E(X) = Pr1X1+ Pr2X2+ . . . + PrnXn C. Derived how to measure risk, Def. Standard deviationDeviation (Outcome minus Expected) Deviation Squared Weight Averaged Deviation Squared (sum of “probability*deviation”)Standard Deviation (Squared root)D. Analyzed Risk averse, Risk neutral and risk loving choice behavior Risk Adverse: Income increases, utility also increases but in a slower rateRisk SeekerRisk NeutralRisk Premium: amount of money that you are willing to pay for certaintyE. Evaluated ways to reduce riskDiversification: practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely relatedThe Law of Large Numbers: the ability to avoid risk by operating on a large scale is based on the law of large numbers, which tells us that although single events may be random and largely unpredictable, the average outcome of many similar events can be predicted

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Actuarially fair: characterizing a situation in which an insurance premium is equal to the expected payout1. The operation of the Firm and the Costs of Production Ch. 6-7 A. Characteristics of the Firm (Classnotes) 1. Teamwork, shirking and monitoring•Teamwork: share equally, jobs and profits•Shirking: when earnings are shared among the team, there is a tendency for shirking•Monitoring: to reduce shirking; owner becomes the monitor sometimes2. Role of Profits: profits monitor the ownerB. Alternative periods of analysis•Long run: all input are variable•Short run: some inputs are fixed, some are variable•Market Period: all inputs are fixed and outputs are fixed B.Explicit and implicit costs:•Explicit cost: cost that appears on your balance sheet, paying outside: accounting cost•Implicit cost: economic cost (includes opportunity cost, therefore, it’s always greater than accounting cost) D. Elements of total cost, fixed and variable: Total = Fixed + VariableE. Law of diminishing marginal returns: As you add more of one input to a fixed amount of other inputs, marginal product declines (adding workers to a factory)Over time, MP decreases, MC increasesF. Derived the interrelationships between ATC, AFC, AVC, MC and the rate of output

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